Most people endure harsh financial times at some point in their lives when there simply doesn’t seem to be enough money to go around. With luck, these circumstances will be survived through a period of belt-tightening. In other less fortunate cases, debt becomes a vicious circle, with more and more borrowing needed just to survive. Eventually, this can mean serious risks such as losing a home become all too real.
When things get to this stage, it can be hard to see a way out, but there are still steps you can take to escape the spiral.
Examine Your Budget
The first step towards achieving financial stability is to take a long, hard look at your budget and see if any positive changes can be made. This isn’t a pleasant activity for most people with money worries, but it’s an essential step to take. Without this, any other efforts to tackle your debt problems will only be a band-aid rather than a possible solution.
Are there any areas in which you can cut back spending? Is it possible to earn a little extra income in some way? Which debts are causing you the most problems? What bills need paying most urgently? Addressing these questions will put your finances on a sounder footing even if they don’t directly solve your difficulties. With the basics in order, you can now move on to a more proactive solution.
If your budget has little leeway for improvement, and your debts are still too large to be handled, then debt consolidation is a popular option that has a good chance of success. The basic idea is to combine all your existing debts into a single larger one, by taking out a loan to pay off all your other borrowings. If done correctly, by ensuring that the new loan is at a lower rate or repaid over a longer period, your monthly repayments will be reduced to a much more manageable level, even though your overall debt level will not be reduced.
Enter a Debt Management Plan
Unfortunately, debt consolidation isn’t an effective solution for everybody. It could be that your debts are simply too huge to be dealt with in this way, or maybe by this stage, your credit rating is so shot that being approved fora new loan simply isn’t a realistic option. In this situation, entering into a debt management plan is the next step to consider.
This involves an admission that your debt situation simply isn’t sustainable and drastic changes are required. By contacting your creditors and explaining that you have no realistic way of keeping up your repayments, you may be able to restructure the debt to make it more affordable. This may be through lengthening the repayment term, reducing the interest rate, or even freezing any further charges to give you a chance to start repaying the principal.
This course of action relies on the cooperation of your creditors, and for this reason, it’s usually a sensible idea to use a debt management agency to carry out the negotiations on your behalf. Their experience and lack of emotional involvement usually lead to more success. although you may have to pay a fee for the service. Free credit counseling charities can also help, but their resources are often limited.
If debt management hasn’t solved the problem, personal bankruptcy may be the only option left. This process needs to be handled by an attorney, and it comes in two basic forms. Chapter 13 bankruptcy is suitable for higher-than-average earners and allows you to keep hold of some assets such as your home or car. Chapter 7 is the more common form of bankruptcy and will use all your available assets to clear as much non-government debt as possible. In both cases, your credit rating will be completely shattered, but by the end of the process, you will be freed from your debts.
The best way of avoiding debt problems is not to borrow in the first place, but this will be cold comfort for anyone struggling with unmanageable repayments. Taking control is the only way to escape the spiral, whichever of the above paths you need to follow. One thing’s for sure, if your debts are causing you severe difficulties, it’s better to take action now as the situation is only likely to get worse if you ignore it.